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CommonWealth REIT (CWH)

Q3 2012 Earnings Call

November 07, 2012, 01:00 pm ET

Executives

Tim Bonang - VP, Investor Relations

Adam Portnoy - Managing Trustee & President

John Popeo - CFO

Analysts

John Guinee - Stifel Nicolaus

Josh Attie - Citigroup

Rich Moore - RBC Capital Markets

Mitch Germain - JMP Securities

Presentation

Operator

Good day and welcome to the CommonWealth REIT Third Quarter 2012 Financial Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Tim Bonang

Thank you and thank you for joining us at an earlier time than originally contemplated. Joining me on today’s call are Adam Portnoy, President and Managing Trustee and John Popeo, our Chief Financial Officer.

The agenda for today’s call includes a presentation by management, followed by a question-and-answer session. I would also note that the recording and retransmission of today’s conference call is strictly prohibited without the prior written consent of CommonWealth REIT.

Before we begin today’s call, I would like to read our Safe Harbor statement. Today’s conference call contains forward-looking statements within meaning of the Private Securities Litigation Reform Act of 1995 and other Securities Laws. These forward-looking statements are based on CommonWealth’s present beliefs and expectations as of today, November 7, 2012.

The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today’s conference call other than through filings with the Securities and Exchange Commission or SEC regarding this reporting period.

In addition, this call may contain non-GAAP numbers, including funds from operations, or FFO, normalized FFO and cash available for distribution, or CAD. A reconciliation of FFO, normalized FFO and CAD to net income is available in our supplemental package found in the Investor Relations section of the company’s website.

Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our Form 10-Q, which we expect to file shortly with the SEC, and in our Q3 supplemental operating and financial data package found on our website at www.cwhreit.com. Investors are cautioned not to place undue reliance upon any forward-looking statements.

And now, I would like to turn the call over to Adam.

Adam Portnoy

Thank you, Tim. And good morning and thank you everybody for joining us on today’s call.

For the third quarter of 2012, we are reporting fully diluted normalized FFO of $0.83 per share, compared to $0.86 per share during the same period last year. During the quarter, we signed 141 individual leases for 1.3 million square feet with 71% representing renewals and 29% representing new leases. The average term for leases entered this quarter were six years and the weighted average rental rates were 2% below prior rents for the same space. Capital cost commitments associated with leasing activity this quarter was $12.79 per square foot, or about $2.13 per square foot per lease year.

As of September 30, 2012 our consolidated occupancy rate was 84.5% which was flat with consolidated occupancy at the end of the last quarter. Our occupancy rate for our wholly-owned properties which excludes results from our majority owned subsidiary Select Income REIT was 79.7% or about 20 basis points lower in June 30th.

Generally, our CBD office properties which represent 54% of our wholly-owned portfolio NOI continue to perform better than our suburban office properties. The Metro Chicago market represents the company's largest market area with 12.6% of our consolidated NOI followed by our Metro Philadelphia market representing 10% of our consolidated NOI. In our Chicago and Philadelphia markets, almost 90% of the NOI comes from downtown office properties.

Within our other market segment, the stronger leasing areas are Australia, Austin, Texas, Seattle, Washington, Pittsburg, Pennsylvania, Boston, Massachusetts and Northern California. About 17% of our consolidated NOI was generated from these six market areas in the third quarter.

On a consolidated same-store basis, our occupancy declined 80 basis points to 83.3% and NOI declined by 2%. The decline in same-store NOI primarily reflects the decline in occupancy in our suburban office portfolio, including some expected declines in occupancy in our Denver and Washington DC portfolios.

Through year-end 2012, we have 1.9 million square feet scheduled to expire and our current estimate is that year-end consolidated occupancy will remain flat at 84.5% for the company. Also our expectation is that same-store NOI and occupancy will continue to be negative through the end of the year due to the softness in the suburban office market.

Looking forward to 2013, we have almost 5.7 million square feet scheduled to expire next year. Almost two-thirds of this expiry square feet is located in our CBD office portfolio and our industrial and other portfolio. We feel confident that we can renew or lease the space in the CBD and industrial properties at rental rates that equal to or higher than current in place rents.

As most of you know, for the last five years, we have been aggressively repositioning CommonWealth’s portfolio into high value CBD office properties with a focus on top performing downtown assets and secondary markets and second tier CBD office properties in gateway cities.

Since September 30, 2007 around the time the most recent recession began, we have acquired $3.8 billion worth of property and a majority of these acquisitions have been high quality CBD office properties. During the same five year time period, we have sold $1.5 billion worth of properties largely consisting of suburban office properties leased to medical related tenants and to government leased tenants.

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